Promo Executives: Fed Rate Cut Could Help Stimulate Sales, Business Investment

The Federal Reserve has reduced interest rates by a half-percentage point, a move that promotional products executives believe could help propel stronger merch sales and lay the groundwork for industry firms to invest more robustly in their own businesses.

The Fed’s Wednesday decision lowered the benchmark federal funds rate to a range of 4.75% to 5%, the first reduction since officials lowered rates to near zero in 2020 to help stimulate an economy then in free fall amid the commerce-killing impacts of COVID-19 and related societal restrictions.

The Fed began hiking rates aggressively in March 2022 to combat what became rampant inflation that, for a time, reached 40-year highs. The acceleration of the increases occurred at the quickest intervals since the early 1980s, and the rates reached a two-decade high during the summer of 2023 – and stayed there for about 14 months.

Still, the pace of inflation has decelerated, approaching the Fed’s target range of about 2% annually. As the decline has occurred, hiring in the U.S. has slowed, unemployment has increased and there are fewer open jobs per unemployed person – all economic headwinds that have some economists worried about a potential recession.

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To help stave off a downturn, 11 of the 12 Fed voters backed the half-point rate cut. Further rate reductions are likely in the months ahead, but at this point it’s unlikely that rates will return to the super-low levels experienced from the Great Recession of 2008 into the COVID-19 pandemic – at least anytime soon.

“We are committed to maintaining our economy’s strength,” Fed Chair Jerome Powell said in a statement. “This decision [to cut rates] reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained.”

A Potential Sales Accelerator

The Fed’s benchmark short-term borrowing rate establishes what banks charge each other for overnight lending and affects borrowing/interest rates throughout the economy. The rates matter to the promotional products industry, as they can impact everything from end-client willingness to buy merch and a promo company’s capacity to invest in its business, to merger and acquisition activity in the market.

Promo executives ASI Media spoke with following the Fed’s decision to cut rates were upbeat, with many saying it could help fuel increased spending on branded merchandise in the months ahead.

“End-buyers who are purchasing promotional products should now have access to cheaper capital that can be allocated to branded products used to promote themselves and engage with customers,” said Andy Shape, CEO of Counselor Top 40 distributor Stran Promotional Solutions (asi/337725) and a member of Counselor’s Power 50 list of promo’s most influential people.

“Additionally,” Shape continued, “those buyers may have more confidence in the overall economy, which could stimulate buying trends and overcome some of the hesitancy that many have seen over the past few months.”

On weakness: ASI Research shows that promo distributors’ collective sales declined, on average, by 0.9% year over year in the first quarter of 2024 and rose just 1.3% on an annual basis in Q2. Still, Tom Rector is among the industry C-suiters anticipating a bump in business as lower interest rates set in.

“The new rates help reduce economic uncertainty, and we think there’ll be a knock-on effect that leads to increased customer spending,” said Rector, CEO of ScreenBroidery (asi/305623), a 2024 Counselor Best Place To Work.

Rector continued: “The cuts are a signal that there is stabilization, and companies will be more inclined to commit to their marketing budgets. Most companies we work with are in good cash positions, but the rate cuts give them confidence to start spending it, knowing that if there is a need and they have to borrow, debt rates will be more manageable.”

Relatedly, some felt the rate decline could provide a bit of renewed vigor to the labor market – a potential catalyst for more investment in promo. “The rate cuts help improve cash positions and should loosen the labor market again where companies can start to grow,” Rector told ASI Media. “They will want to retain good talent, and merchandise is a great way to do so.”

Counselor Power 50 member Frank Carpenito, CEO of Counselor Top 40 supplier Gemline (asi/56070), shared that a reduction in borrowing costs that will result from the rate lowering will allow end-client companies to push more spend toward marketing and other growth-focused levers in their businesses, including promo.

“The big question, however, is ‘How quickly will this occur?’” Carpenito said. “I suspect there will be some timing lag but that it will open up some year-end spending that may have previously been on hold.”

Timing was on Mike Wolfe’s mind, too. The CEO of Counselor Top 40 distributor Zorch (asi/366078) viewed the rate cut positively but wasn’t yet sold on the idea that it will quickly spark swag spending.

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“The rate reduction is likely to be relevant if it helps prevent a recession and for the economy to achieve the ‘soft landing’ from the inflationary period we just went through,” said Wolfe. “Only time will tell, but if future economic indicators continue to point to declining inflation without a reduction in economic activity, our customers will likely keep marketing budgets intact.”

Counselor Power 50 member Marc Simon, CEO of Counselor Top 40 distributor HALO Branded Solutions (asi/356000), was encouraged by the half-point rate cut.

“It appears we may be gliding toward a relatively soft landing, meaning avoiding a serious recession without needing to endure deep and painful unemployment,” Simon told ASI Media. “This would be positive for our economy, positive for our customers and positive for our industry.”

Reinvesting in Growth Efforts

As lower interest rates start to pervade the economy on the back of the Fed’s cut, some promo executives maintained that branded merch providers will be able to invest more deeply in their own businesses and thereby strengthen them.

“The high cost of capital over the past few years has made it difficult for many companies in our industry to fund their working capital needs while also proactively investing back into their own business,” Shape stated. “As rates come down, it should ease the financial burden for companies who are leveraging debt while allowing them to reinvest those savings into growth efforts for their own business.”

Shape said initiatives could take a variety of forms.

“Both suppliers and distributors may be more willing to invest in deeper inventory, new equipment or technology solutions that can create a more efficient supply chain and expanded product offerings,” he told ASI Media.

Efforts are already underway at ScreenBroidery.

“In anticipation of the cuts,” said CEO Rector, “we have over the past several weeks started conversations around new equipment purchases, team training and development, customer events, new positions and possible acquisitions.”

Will Industry M&A Be Affected?

Speaking of mergers and acquisitions: There’s a school of thinking that lower interest rates will spur M&A across various industries.

After all, lower rates make it less expensive for companies and private equity firms to secure loans that could be used to buy other businesses. With interest rates in the basement during COVID, for example, 2021 marked a record year for merger and acquisition activity.

M&A dipped in the promotional products market in the latter half of 2023 as rates soared but has been on the upswing again in 2024. Could the Fed’s rate snip and future cuts further accelerate dealmaking? Some industry executives think so, though there’s not a definite consensus on that or how significant more substantial activity will be.

“I would expect M&A to gradually increase as the Federal Funds rate declines, which should also extend to the promo industry,” said Dilip Bhavnani, chief operating officer at Counselor Top 40 supplier Sunscope (asi/90075).

Rector is forecasting a rise in M&A, too.

“Some promo companies saw a decline in business and loss of value when times got tough,” he told ASI Media. “It’s scary and an opportunity to accept a good offer from a buyer. The rate cuts make it easier for buyers to get more aggressive.”

Since listing on the Nasdaq Stock Exchange in late 2021, Stran has been among promo’s more active acquisitors, purchasing a handful of companies, including a deal in August that saw the Massachusetts-based firm buy Gander Group, a $34 million-in-annual-revenue provider of casino continuity and loyalty programs.

Even as interest rates lessen, Stran CEO Shape opined that marketplace nuances in promo may shift but ultimately result in roughly the same levels of M&A that the market has been experiencing of late – that’s to say, active but not wildly accelerated.

“The rate cut could make M&A more accessible for a broader range of buyers, but sellers might be less inclined to off-load their businesses if they can more easily manage their debt and working capital now,” said Shape. “Because of that, I believe that the M&A activity will stay steady and follow a similar pace. There will be more buyers because of cheaper access to capital but less sellers since they can sustain and grow their own business for less.”